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Texas Sales Tax Update for August 2023

Texas Sales Tax

A Texas Sales Tax Update: Decreased Collections, Sales Tax Holiday, and New Exemptions.

A recent report from Axios highlights the reality many large U.S. cities, including in Dallas and North Texas, could soon be facing—a decrease in the rate of overall sales tax collection as inflation slows. While collections are still up year-over-year in Dallas, that trend has been reversing since February and could continue into the foreseeable future as inflation stabilizes. Other recent developments in Texas sales tax laws could also cause a decrease in sales tax revenues for state and local governments. We discuss those details below and offer some perspective for what these trends could mean for Texas businesses and their sales tax compliance moving forward.

Two Reasons Why Texas Sales Tax Collections Could Further Decline

Apart from shifts in the broader economy, Texas’s sales tax revenues could see a change in the short-term because of the state’s recent sales tax holiday and new legislation exempting certain healthcare products.

What Items Were Exempt During Texas’ Sales Tax Holiday From August 9 to August 11, 2023?

The purchase of qualifying school supplies, clothing, shoes, and other items were all exempt during the weekend of August 9 to August 11 as part of the Texas sales tax holiday. The sale price for items had to be less than $100, which includes changes in price due to discounts or charges for delivery, transportation, and handling. Additionally, sellers did not need to obtain exemption certificates from customers.

While the sales tax holiday is a welcome break for customers and business, it can create difficulties in reporting and compliance. Be sure to keep good records of sales made during the holiday and review them for potential items where sales tax was over or under collected and could lead to a future audit. Likewise, online retailers with significant sales in Texas will want to review their compliance with the holiday and be sure to remit or refund any overages in sales tax collected on exempt items.

New Healthcare Product Sales Tax Exemptions Start September 1, 2023

While the holiday offered temporary changes to Texas sales tax, recently passed SB 379 establishes new permanent sales tax exemptions for certain healthcare products by amending Tax Code Section 151.313. Specifically, the following items will be exempt beginning on September 1, 2023:

  • Wound care dressings (Note: the exemption covers certain items like adhesive bandages and pads but excludes other items like cotton balls and tissues). See Tax Code Section 151.313(g) for details.
  • Adult or children’s diapers
  • Baby wipes
  • Feminine hygiene products
  • Maternity clothing
  • Breast milk pumping products
  • Baby bottles

With the new law, Texas joins a growing list of states that have amended their sales tax systems to exempt feminine hygiene products and related healthcare products.

What These Sales Tax Trends Could Mean for Texas Retailers

These shifts in Texas’ sales tax laws paired with broader dips in the state’s sales tax revenues could lead to increased scrutiny for businesses during an audit of their returns. Additionally, Texas could increase efforts to collect tax from online retailers and ecommerce companies outside the state that have economic nexus. If you or your clients are a Texas business with taxable sales, consider the following checklist to address your compliance amidst these new changes:

  • Ecommerce and online retailers should double-check potential economic nexus.
  • Review transactions during the sales tax holiday for potential issues in reporting.
  • Adjust the tax codes in your POS system for any items affected by the new exemptions on healthcare products.
  • Take information requests and audit notices from the Texas Comptroller’s Office seriously.

You can schedule a meeting with one of our Texas sales tax professionals for help with any of the above issues or for assistance with resolution of your audit defense, assessment appeal, or refund claim. Contact us today!